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The family business that lasts

Communicating about key issues is crucial if the family business is to survive the test of time, says consultant Peter Leach

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‘Asia has looked at (family business issues) more seriously in the last five to 10 years. The global statistics are terrible – only 13 per cent of family businesses survive the third generation. They break up, get sold off or fail because they can't resolve the succession problems.'

HANDING over the reins of a family business to the next generation or a carefully selected crew of non-family professionals is almost invariably a complex challenge.

Peter Leach, partner at Deloitte Global Leader Family Enterprise Consulting, says failure to communicate about key issues is one reason why most family businesses fail the sustainability test.

There is also a key cultural difference between Asian and Western business families. "In Asia, the family holds the business together. In the West, the business holds the family together. Family is everything in Asia; people know their frst and second cousins. In the West, people know their frst and second cousins because of the business.''

Mr Leach has advised business families worldwide for over 30 years, specialising in governance issues. He was in Singapore earlier this year for a family business forum organised by the Singapore Business Federation.

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He says while Asian business families have had a relatively shorter history than those in the West, they are fast catching up in terms of awareness of the issues. "I would say families in India have looked at these issues for the last 20 years, and Asia has looked at them more seriously in the last fve to 10 years. The global statistics are terrible – only 13 per cent of family businesses survive the third generation. They break up, get sold off or fail because they can't resolve the succession problems.''

One big vulnerability is the failure to have "real conversations about the real succession arrangements'', he says. "Very often the conversations that families need to have are the ones they say they can't have because they're too diffcult. They lift the carpet, put it under and 20 years have gone by.''

Mr Leach adds: "The patriarch says to his frst-born son: ‘Some day you will take this business over.' Three years later there is another boy who is brighter. When he is older, dad says: ‘I'd like you to have the business.' He has said the same thing to two children and he is stuck.

"Any issue that is not sorted out by one generation will be tackled by the next. If the father and children can't sort it out, sometimes the father decides to let the kids sort it out. What this means is that the kids will fght it out.''

Mr Leach explains the dynamics of a family business in terms of a three circle model, frst developed at the Harvard Business School. The overlapping and interlocking circles comprise family, enterprise and owners, and constitute a model to help explain the various interests and motivations that can often be a source of tension.

"What you do is to balance those three circles. Each party has a goal and if you put too much emphasis on one or the other, it falls over.''

Leaving the enterprise

For owners, for instance, the challenge is alignment: How are decisions made and how to ensure there is fairness? For the enterprise, there is the question of objective. "Is it a store of family wealth? Or to produce jobs for the family, or provide income? How will it be governed and can family members leave the enterprise?

"If you have plenty of money outside the enterprise you can leave. But if you haven't protected yourself fnancially, how do you leave? You may have to ask the next generation to look after you in your old age; if you have to do that, you're in trouble.''

Mr Leach says it is important to tackle the question of exit mechanisms for the family, often a taboo subject. "You have to have a governance system that allows autonomy and independence. The father or mother may say you can't leave. The shares are not available or are held in a trust. If you leave you get nothing. So people are stuck. If they are stuck in a life they can't choose for themselves, the family business can be a very bad place to be.''

He adds: "The whole point of the family working together is to create a system where people feel suffciently connected that they want to be involved, but with suffcient autonomy so they feel they're not being controlled. That's the holy grail.''

There is also the question of family values – do all the members share the same values? "With siblings it's easier as they grew up in the same household. But cousins may differ. One 17-year-old may drive a 10-year-old car; another 17-year-old, a Ferrari. So you may have a conflict.''

Mr Leach says that while subsistence businesses probably need not bother about governance, large or small businesses will beneft. "If it's a business with growth potential, employment, multiple members of the family working together, there is no size criteria. You have to do it. If you don't, you get careless.''

In their governance structure, families will also have to decide on an approach towards the management of conflicts – or differences, as Mr Leach prefers to call them. "Conflict denotes people fghting in bunkers. Families always have differences of opinion, values and views. We use the word ‘differences'. If you accept that differences exist, you can create a process to manage them. When you start talking about conflict, it conjures up lawyers and the court.

"If a family ends up in court the value destruction is enormous, especially if the business is branded, a big retail or family consumer group. Those can be utterly destroyed and tarnished by a court case. One of the things you have to do in a governance system is to create policies and procedures to manage differences to protect a family's good name and possibly, brand.''

He says families are increasingly turning to the arbitration model to resolve disputes rather than the courts. W

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